| Chandra: Pulling punches
New Delhi, Dec. 23: The Naresh Chandra committee, formed by the government for firmer auditing regulations, today submitted a report which pussy-footed on its stated aim to tighten rules against errant auditors.
The report has decided against forcing companies to rotate auditors, something which many feel could encourage management-auditor nexus. It also decided against setting up a Public Accounting Oversight Board which would act as a regulator for auditors.
Both these issues were key recommendations of the US legislation — the Sarbanes-Oxley Act — initiated after a series of audit scams hit Corporate Americana earlier this year. The Chandra report otherwise has tailored itself more or less on the lines of this Act.
The Sarbanes-Oxley Act — aimed at cleaning the auditing process — became a law in July. Among other things, it sets up a Public Company Accounting Oversight Board to oversee auditors and rotation of company auditors every five years.
But the accountants there had persuaded the country’s legislators to dilute the ‘audit-rotation’ clause to a mere rotation of audit-partners every five years.
The Comptroller and Auditor General of India had also suggested that audit firms be rotated so as to avoid a nexus between corrupt promoters and ‘black sheep’ auditors, a recommendation that the Naresh Chandra Committee, comprising mainly industry-body representatives, has chosen to ignore. Instead, it has suggested similar ‘audit-rotation’ every five years.
A key recommendation of the Corporate Audit and Governance Committee is setting up of a Corporate Serious Fraud Office. Other suggestions include mandatory certification of the correctness of the annual audited accounts by CEOs and CFOs, and a provision that atleast 50 per cent of the board should be composed of independent directors.
“All listed firms with a paid-up capital of more than Rs 10 crore or turnover exceeding Rs 50 crore should certify correctness of the annual audited accounts,” the report states.
The report defines an independent director as one who does not have any financial, business, personal and employment relationship with the company apart from receiving the normal director-fees.
The report has also suggested setting up several disciplinary committees within these institutes so that the appeal lies with a tribunal headed by a retired Supreme Court judge or a retired Chief Justice of a high court.
It has suggested that a Corporate Serious Fraud Office be set up, in consultation with the department of company affairs to deal with larger corporate frauds.
“There will be independent quality review boards for each of these institutes, comprising persons of eminence, to periodically review audit quality, secretarial and cost accounting firms,” the report said.
The committee has defined the auditor-company relationship by listing the non-audit services that an audit firm may not provide to the client. Auditors should disclose contingent liabilities clearly and qualified accounts to be forwarded by the auditor to the Registrar of Companies, Sebi and the principal stock exchange.
However, the Naresh Chandra committee said public opinion would now be elicited to fine-tune this comprehensive report and carry out the necessary changes in the Companies Act and other statutes.